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Which Way Wednesday – Big Tech Earnings and the Fed

Apple (AAPL) beat estimates by 30% and the stock is down.

That should tell you something.  How stretched does this market have to be that a company that sold $81.4Bn worth of product in Q2 and made $20Bn in 3 months LOSES share price on a 30% beat?  Revenue from iPhone sales came in at $39.6Bn, up nearly 50%, and well ahead of the Street consensus forecast of $34.2 billion as well and, more importantly, less than 1/2 the company's total revenues – it's what investors always wanted!

In fact, the company exceeded estimates in every product category. Mac revenues were $8.2Bn, up 16%, while iPad revenues were 12% higher at $7.4Bn. Revenue from wearables, home, and accessories was $8.8Bn, up 36%. Services revenue was $17.5Bn, up 33%. The company said it finished the quarter with more than 700M paid subscribers across its services portfolio, up more than 150M from a year ago.  Revenues in the Americas were $35.9Bn, up 33%, while Europe came in at $18.9Bn, up 34%, and Greater China revenue was $14.8Bn, up 58%.  Revenues in Japan were $5.5Bn, up 30%, and the rest of Asia was $5.4Bn, up 28%.

CFO Luca Maestri said in a statement that the company set revenue records in each geographic region, with double-digit growth in each product category. He said the company returned nearly $29 billion to shareholders in the quarter in dividends and stock buybacks.  He also said (and this is why they are selling off) that the company sees strong double-digit revenue growth in the September quarter, but at a smaller level than in June, for three reasons.

  • One – Foreign exchange issues will be 3 percentage points less favorable.
  • Two – Services growth will be lower, after the June quarter benefited from an easy comparison in the year ago quarter, when advertising and Apple Care revenues were impacted by the pandemic.
  • Three – Supply constraints will be higher than they were in the June quarter, with a particular impact on iPhone and iPad sales.

Apple may be the greatest company on the planet but, at 27 time forward earnings, they can't afford to make a misstep, or have supply constraints.  Companies that are this good have to worry about their suppliers, as well as their own business.  

Meanwhile, rather than stressing over whether AAPL or MSFT can justify 30x earnings, how about investing in a pedigreed tech company that "only" has a $34Bn market cap but makes $4Bn in profits on $63Bn in sales?  HPQ does not have AAPL's growth but they are steady performers and even made $2.8Bn last year, during the lockdown.  

I love their new, trendy logo but it's the same old HP, making so many things that businesses depend on every day along with a thriving service division.  Windows 11 requires better hardware so I think PC sales will pick up this year – especailly considering companies did little or no upgrading last year.  HPQ still has 42.4% of the global printing market and I still think that, if you want to pick an ultimate winner in 3D printing – it will be HPQ.

HPQ pays a respectable 2.72% dividend but, initially, for the LTP, we'll just promise to buy it if it gets cheaper:

  • Sell 15 HPQ 2023 $25 puts for $3 ($4,500)
  • Buy 25 HPQ 2023 $22 calls for $7.50 ($18,750)
  • Sell 25 HPQ 2023 $30 calls for $3 ($7,500)

That's net $6,750 on the $20,000 spread so we have $13,250 (196%) profit potential if HPQ can finish over $30 in Jan 2023.  Not a big ask and our worst case is being assgined 1,500 shares at $25 and losing our $6,750, which would be another $4.50/share so we'd be at net $29.50, which is more than HPQ is now so it's an aggressive play but we're very happy to double down on this one if it sells off.

We will see this afternoon (2pm) what the Fed has to say but no one expects them to actually DO anything – just a minor tweak to the language of the statement and, of course, Powell's press conference comes after.

China State Media Seeks to Calm Investor Nerves After Stock Rout

China’s Escalating Property Curbs Underline Xi’s New Priority

The China Model: What the Country’s Tech Crackdown Is Really About

Asian Stocks Track U.S. Decline Amid China Risk: Markets Wrap

Oil Resumes Gains as Report Points to Shrinking U.S. Stockpiles

U.S. Copper Buyers Face World’s Highest Prices as Demand Booms

White House Orders Staff to Again Wear Masks Amid New Danger.

NY, LA Among Big Cities Joining Rural Areas in CDC Mask Zone.

CDC Reverses Indoor-Mask Rules, Biden Mulls Mandating Vaccines For Federal Workers, Threatens Lockdowns

Visa Card Spending Buoyed by Return of Travel, Stimulus Checks

No Crabs, No Scallops: Seafood Is Vanishing From Menus in U.S. 

Landlords Sue U.S. for Rent Unpaid Under Eviction Moratorium

Lawmakers Say Infrastructure Deal Within Reach

Google advertising revenue rises 69% from last year

Microsoft posts big earnings beat and gives optimistic revenue forecast

Starbucks earnings beat, fueled by U.S. cold drink sales, but stock drops on weak China outlook

Orange Juice Futures Soar Amid 'Frost Threats' In Brazil

Inflation Shock: Are You Ready To Start Paying "$40 Or $50" For A Hamburger?

The Overall Mood In The US Grows More Pessimistic

 


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  1. Good Morning.


  2. Phil / BABA – I'm confused.  I'm tracking the LT port with the following ( note this is after a previous roll for 30k) . 

    40X Jan '23 200 calls ( 44) 

    -40X Jan '23 290 calls (16) 

    -11 Jan '23 200 puts (35) 

     Part of my just wants to put nothing into it and roll the 295 short calls to the 250. end up with the below   - lower upside but also lower downside, take 26K off the table and bee at net zero…. 

    40X Jan '23 200 calls ( 44) 

    -40X Jan '23 250 calls (18) 

    -11 Jan '23 200 puts (35) 

    What do you suggest  ?  Thanks 


  3. Good morning!

    BABA/Batman – We bought back the short calls (too early).  The 2023 $290s are now $11, not really worth buying back.  The $250s are $18.50, if you don't need the money, I'd rather just sell short-term calls when they bounce.  I think BABA is down for no good reasons so the only adjustment I can really get behind is being more bullish under $200 – you are retreating.  This happens because you take very large positions and then, when they go against you, you aren't excited about doubling down or rolling to improve – instead you get nervous and look to fall back.  Over the course of 18 months – almost every stock is going to have a 20% pullback at least.  If that's where you take your losses – you'll end up taking a lot of losses.  If, on the other hand, that's when you move to a full position – you'll have a lot of full positions you scaled into at 20% off. 

    BABA is at $1Tn at $192.50 with $172Bn in sales and $26Bn in profits.  They were about 1/3 of that in 2019, STILL had a great year last year and growing another 40% this year – very eciting.  People are selling out of fear on Chinese stocks and we got bitten for NOT selling our CHL out of fear so I'm not going to say you should keep it – but I'm sticking to the plan on this one.


  4. Phil / BABA – thanks….  I'm opting for the short term callers on this one…   China state was pumping up stocks last night…..  so they must be feeling a bit of the pain…. 


  5. Two experimental plays;

    ABBV trading at 118.30 and paying July 30 a div of 1.30. I sold the Aug 20 117 covered call for 3.38 with a extrinsic value of 2.08.

    Importent to me is that the extrinsic value is more than the div. as you can see by .78 cents. If called I made my money on the caller and receive 11700 in cash back from the assignment. However possible the stock goes down, I am covered to 114.92. Anything between 114.92 and 117 is profit.

    I did the same with AMGN bought the stock and sold the Aug 240 for 7.70. Well you do the math on this one. Here the div is 1.76.


  6. BTW I hold both these stock already for a long time with fat profit plays, so I do not mind holding more stock for a reduced price.


  7. Phil LOGI might be an intersting future play. Can you have a look at it. TIA


  8. I see PETS is on the move again, was a good buy at 28.


  9. Good idea, Yodi.

    This is a good take on BABA:

    Over the past three trading sessions, Alibaba's (NYSE:BABA)(OTCPK:BABAF) share price has dropped 13%, breaking the long-term support. It is a fact. But now I propose to pause and analyze in detail what actually happened during these three days.

    Source: Trading View, Author

    July 23

    The fall began after Bloomberg announced that the Chinese authorities are developing new restrictions on the education industry (rumors about this appeared at the end of May). Later on Saturday, the information was confirmed in the Chinese media. In the list of planned changes, two key points should be highlighted:

     

     

    … Local governments shall stop approving establishment of new off-campus curriculum subject-tutoring institutions for students in compulsory education, and existing institutions shall be registered as non-profit institutions.

    … Curriculum subject-tutoring institutions are not allowed to go public for financing; listed companies should not invest in the institutions, and foreign capital is barred from such institutions.

    Source: xinhuanet.com

    Until recently, the education industry in China was associated with colossal potential many times more than the United States:

    10 charts that explain the Global Education Technology market – HolonIQ

    Source: holoniq.com

    Of course, the ban on attracting foreign funding will force Chinese edtech companies to radically rethink their business models. Moreover, the position of the Chinese regulator means that companies in this sector have a very high risk of delisting in the United States.

    The way the market reacted to this is very clearly reflected in the dynamics of the shares of the Chinese educational platform TAL (NYSE:TAL):

    Chart
    Data by YCharts

    Now let's ask ourselves the main question: will this have a direct impact on Alibaba's core business? Obviously not.

    What does this mean indirectly? This means that the Chinese government continues to take steps to tighten control over technology companies. In other words, nothing new.

    In this context, the opinion of the economist Paul Romer deserves attention. He believes that these actions by the Chinese government are generally in line with the global trend. Because the capabilities of tech companies have grown so much that they already pose a threat to internal stability. However, this is a topic for a separate article.

    July 26

    The market focused on the article by the Wall Street Journal that Ant Group (an affiliate company of Alibaba) may start sharing information about its customers with the Chinese government.

    Of course, this is unwanted news for users of the payment platform. But we are talking about China. Hardly anyone out there really believes in the complete privacy of personal information. This is my subjective opinion, but it is unlikely that the planned sharing of information is not already taking place. In other words, nothing new again.

     

    Bottom line

    (1) The behavior of the Chinese tech market is very much like panic. There is no room for fundamental and technical analysis.

    (2) One way or another, the actions of the Chinese authorities in relation to technology companies are dictated by the desire not to destroy the industry, but to preserve their power and stability in society. Chinese tech stocks have been falling since November last year. Perhaps the Chinese government should notice this and moderate its activity.

    (3) Alibaba will publish its quarterly report in four days. According to the consensus of analysts' expectations, the company's annual revenue will approach $120 billion. If we consider the long-term relationship between the company's capitalization and revenue, now Alibaba is at the level of 2018, when revenue was three times less. The gap between the fundamental and actual price of the company continues to grow.

    Source: visualizedanalytics.com

    (4) Of course, the risks remain high. It is not known what steps the Chinese government will take in the future. And the unknown is the main risk. But sooner or later the risks will become less than fundamental underestimation.


  10. Discipline creates and good mental game – Phil made a comment earlier about BABA, not so much about batman's position, but a general philosophy that I've needed to have beaten into my head over the years.  One of the best concepts I've learned from Phil is:

    1) Start with a small position so you can put more money into a position and adjust

    2) Have cash on hand to put more money into a position and adjust

    That's where Phil makes a good bit of his gains in his portfolios. When adjustment are being made.   

    When I spread myself too thin, and don't have cash, my positions will move against me, I'll take huge paper losses, feel like crap because I can't do anything about it except hope they bounce back.  And Hope is not an investing strategy.  Then I get discouraged and quit.  That's a mental game that is completely avoidable with good discipline in setting up positions.


  11. LOGI/Yodi – Not sure why it would be a future play.  They had a huge surge last year as more people working at home bought the kind of accessories they were used to having at the office.  Gaming is boosting them too.  They made so much money, they are buying back $1Bn in shares (5%) and boosting the dividend (but still under 1%).  They were a $50 stock at $10Bn when they were making $250M and now they are a $100 stock at $20Bn making $700M which is 28.5x so it's certainly no bargain BUT it's a p/e they have sustained for many years.  

    No harm in playing it conservatively low in the channel so I'd go for:

    • Sell 5 LOGI 2023 $85 puts for $7 ($3,500)
    • Buy 10 LOGI 2023 $80 calls for $33.50 ($33,500)
    • Sell 10 LOGI 2023 $100 calls for $20.50 ($20,500)
    • Sell 5 LOGI Sept $115 calls for $2.45 ($1,225)

    That's net $8,275 on the $20,000 spread so $11,725 (141%) of upside potential if the stock doesn't drop 10%.  If it stays in the channel, we should make money on 1/2 of the 10 opportunities to sell calls so hopefully we can drop the basis to near $0 over time and, of course, if LOGI pops, you need to plan to buy more longs and do a 2x roll – that's why we have such a conservative start.

    PETS/Yodi – You know I love them when they are cheap.  We missed the spike down to $25 and we already in them in the Earnings Portfolio. 

    PETS Long Call 2023 20-JAN 25.00 CALL [PETS @ $30.09 $0.35] 20 10/27/2020 (541) $20,000 $10.00 $-1.90 $10.00     $8.10 - $-3,800 -19.0% $16,200
    PETS Short Call 2023 20-JAN 35.00 CALL [PETS @ $30.09 $0.35] -20 10/27/2020 (541) $-14,000 $7.00 $-2.45     $4.55 $0.34 $4,900 35.0% $-9,100
    PETS Short Put 2023 20-JAN 30.00 PUT [PETS @ $30.09 $0.35] -10 5/19/2021 (541) $-8,000 $8.00 $-0.65     $7.35 - $650 8.1% $-7,350

    That $20,000 spread is still a net $250 credit, so of course good for a new trade.

    In the LTP, let's sell 10 of the PETS 2023 $30 puts for $7.35 ($7,350) just to pick up some cash as we're very happy to buy them for net $22.65.

    Market Cap for PETS is just $600M down here and they make $30M so 20x and generally 5% steady growth on the top line.  Inflation should give them a chance to improve margins.  Also interesting is they pay a 4% dividend – another reason we don't mind owning them.

    • PetMed Express (NASDAQ:PETS): Q1 GAAP EPS of $0.22 misses by $0.13.
    • During the quarter ended June 30, 2021 there were one-time charges of $717,000 related to the CEO’s separation agreement. The Company also incurred an additional cost of $260,000 related to brand and marketing consulting fees.

    I think they kitchen sinked the quarter on the CEO change.  

    Discipline/Buckeye – That's the hardest thing to teach traders – even professional money managers.  People think they have to be invested to make money but it's mostly the opposite – as Buffett-watchers know.   And also our friend Mr. Rothstein:


  12. PHil PETS I think you mean the Jan 23 30 puts to sell and not the calls







  13. PETS/LTP – I'm sorry but that was selling PUTS, not calls.   Thanks, Yodi.



  14. Whole lotta nothing from the Fed:

    Image


  15. Google delays return to office, mandates vaccines


  16. PETS/LTP/Yodi – Thank you, that was the 2023 $30 PUTS we are selling, not the calls.



  17. Powell says Fed will act if inflation is "too high" whatever that means.  Still insists the current inflation is transitory.


  18. Oil was a nice draw, by the way:

     

     

        

    Mostly it was the Dollar:

     

       

    Pretty blah action and that's not good with all those Big Tech home runs.

    The question is did they MAKE that money or TAKE it from other companies?


  19. I forgot to get into it on HPQ earlier but, again, with $100,000 allocation blocks (there are 20 of them in a $2M portfolio and margin brings us to $4M in buying power available) we have no issue whatsoever owning 1,500 shares of HPQ at net $29.50 ($44,250), which is our worst-possible, poorly-managed case. 

    • The short puts would not trigger, of course, unless the stock is below $25 but if at $25, there's no loss on top of the $6,750 we put into the trade (6.75% of an allocation block) so no damage there and even at $20 we are down $7,500 additional on the short $25 puts so we could either take that loss ($6,750 + $7,500 = $14,250 or 14.25% of an allocation block) or roll it to 2x the 2025 $20 puts, which would then commit us to owning 3,000 shares at $20 ($60,000) + the $6,750 loss is about $22.20/share. 
    • Do we REALLY want to own 3,000 shares of HPQ, now $28.50, for $22.20 (22% discount)?  If so, all of the above is a no-brainer.  And, of course, we could then sell 2025 $22.50 calls for $3.50ish and that drops our net to $18.70 on 3,000 ($56,100) and that's STILL only 1/2 an allocation block.  Then let's say we sell 30 2025 $17.50 puts for $2 and then we're down to $16.70 net in ($50,100) and our new worst case is owning 6,000 shares at $17.10 avg – which is 1/2 the current price of the stock.
    • So our worst-worst case is now owning 6,000 shares for $102,600 and we're getting our 4% dividend and we can sell maybe $18,000 worth of calls while we wait for HPQ to come back in fashion.  If that is appealing to us – nothing that happens between now and 2025 is going to bother us about the position unless something happens that completely destroys our value premise for the company.   Otherwise, simple patience is required.

    Similar logic is behind all our LTP positions which is why changes in PRICE do not bother me very much.  Changes in FUNDAMENTALS, like CHL being de-listed – that is what we watch out for.  

    And, of course, once a position is well on-track (as most of our LTP positions are) we can release the allocation block for a new trade – relying on the profits we already have to cushion any downturn (as well as our STP hedges, of course).


  20. FB fails to justify their $1Tn market cap, despite earnings beats.